Category: Need

Easterlin: why there is still a paradox

Richard Easterlin argues here, based on previously unpublished findings, that research which claims to have found evidence of a relationship between economic growth and well-being as measured via life satisfaction in developed nations, is based on an incorrect interpretation of the data. He says that economic growth has in fact, in most countries, been associated with increasing life satisfaction.

He writes:

“It is gratifying to see that scholars and policymakers are starting to pay serious attention to what people say about their well-being; over the past two to three decades surveys of subjective well-being have grown rapidly. At the University of Southern California in the past year or so my research associates and I have been trying to find out what the data for countries throughout the world tell us about an important question: ‘Does happiness improve commensurately with the rate of economic growth?’

Our interest has been to establish the facts without preconceptions as to the answer, pro or con. We tried to find countries with at least three comparable measurements of subjective well-being in a time series of at least a decade, making sure that the question asked is always the same and that there are no shifts in the question context or geographic coverage of the surveys so great as to invalidate comparisons at different dates. Here is what we have found:

  1. In sixteen developed countries with time series at least 21 years in length, there is no significant relation between the rate of economic growth and the improvement in life satisfaction.
  2. In seven countries transitioning to free market economies with time series that are at least 14 years in length and include a measurement before or close to the beginning of transition, there is no significant relation between the rate of economic growth and the improvement in life satisfaction.
  3. In thirteen developing nations spanning Asia, Africa, and Latin America with time series at least 10 years in length (the average being 15 years), there is no significant relation between the rate of economic growth and the improvement in subjective well-being.
  4. Pooling the data for all thirty-six countries above, there is no significant relation between the rate of economic growth and the change in life satisfaction.

How is it possible that able and serious analysts working with much the same data have come to a different conclusion – that well-being is positively associated with economic growth? There are several reasons, but the principal one is that they mistake a short term positive association between well-being and GDP per capita for the long term relationship. In major economic contractions and expansions, life satisfaction tends to follow the V-shaped pattern of GDP per capita, resulting in a positive association between the two over the short term. This is demonstrated most dramatically by the countries that have been undergoing economic transition since around 1990. But when the time span of the analysis is lengthened to the point where these short term movements cancel out, the positive relation between happiness and GDP per capita disappears. There is therefore good reason to regard the Easterlin paradox as alive and well as a problem for classical economic theory.”

The limits to measuring growth

In a now-classic paper from 1974, the American economist Richard Easterlin used survey data to show that aggregate levels of subjective life satisfaction in the US had not risen in line with post-War economic growth – this result was termed the ‘Easterlin paradox’: richer people at any given point in time may be happier, but as we all get richer, we don’t all get happier. Easterlin attributes this paradox to the importance of relative income to well-being. Once a certain absolute level of income is reached, gains in well-being are only due to having higher income relative to other people, not simply from having higher income per se.

These findings have been widely replicated in the empirical literature, but they have not gone unquestioned. A 2008 research paper by economists Stevenson and Wolfers has cast doubt on whether the Easterlin paradox holds in general for all countries. But here, Easterlin argues , based on previously unpublished results, that this interpretation of the data is incorrect and that economic growth has not, in most countries, been associated with increasing life satisfaction.

This debate will doubtless continue as more and better data are collected. But there are some key reasons why economic indicators fail to give a true picture of national well-being.

1. As the economies of developed countries have grown, improvements in well-being have stagnated

Even where increases in well-being are observed, the magnitude of any increase is small even in those countries where it may be statistically significant. Increases are not observed in all countries where they might be expected – no-one makes the case that life satisfaction has risen in the US, for instance, and there is evidence that US women have actually become less satisfied since the 1970s.

2. Well-being is much less strongly influenced by income than by other aspects of people’s lives

A review of the extensive research in this area suggests that only a small proportion of the variation in subjective well-being is attributable to material and environmental circumstances – perhaps as little as 10 per cent. Around 50 per cent is due to relatively stable factors such as personality, genes, and environment during the early years and 40 per cent is linked to the ‘intentional activities’ in which people choose to engage: what they do and how they behave (both on their own and with others), their attitudes to the events in their lives, and the sorts of goals they are motivated to pursue.

3. Wealth based on growth does not lead to equality of distribution

Modern economies are organised explicitly around the need to increase GDP, with relatively little regard for how it is distributed; business models are predicated on maximising profits to shareholders; and people are led to believe that the more disposable income they have – and thus the more they consume – the happier they will be. But economic indicators tell us nothing about whether people are in fact experiencing their lives as going well. There is a pressing need for a better, more direct way to measure society’s performance against its overarching goal of improving well-being.